Professional Documents
Culture Documents
Forecasting Exchange Rates
Forecasting Exchange Rates
Forecasting Measuring
exchange exposure to
rates exchange rate
Managing fluctuations
exposure to
exchange rate
fluctuations
Chapter
9
Forecasting Exchange Rates
C9 - 3
Why Firms Forecast
Exchange Rates
• MNCs need exchange rate forecasts for
their:
Apakah transaksi perlu dilindu
¤ hedging decisions,
¤ short-term financing decisions,
¤ short-term investment decisions,
¤ capital budgeting decisions,
¤ long-term financing decisions, and
¤ earnings assessment.
C9 - 4
Forecasting Techniques
C9 - 5
Technical Forecasting
C9 - 6
Fundamental Forecasting
• Fundamental forecasting is based on the
fundamental relationships between economic
variables and exchange rates.
• A forecast may arise simply from a subjective
assessment of the factors that affect
exchange rates.
• A forecast may be based on quantitative
measurements (with the aid of regression
models and sensitivity analysis) too.
C9 - 8
Fundamental Forecasting
C9 - 9
Market-Based Forecasting
C9 - 10
Market-Based Forecasting
C9 - 11
Mixed Forecasting
C9 - 12
Online Application
C9 - 13
Forecasting Services
C9 - 14
Forecasting Services
C9 - 15
Evaluation of Forecast Performance
C9 - 16
Evaluation of Forecast Performance
C9 - 17
Evaluation of Forecast Performance
Using the Forward Rate as a Forecast for the British Pound
Absolute Forecast Error ($)
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
1975 1980 1985 1990 1995 2000
C9 - 18
Evaluation of Forecast Performance
C9 - 19
Evaluation of Forecast Performance
C9 - 20
Forecast Bias
C9 - 21
Forecast Bias
Using the Forward Rate as a Forecast for the British Pound
$2.60
$2.40
Forward Rate
$2.20
$2.00
$1.80
$1.60
$1.40 Realized
$1.20 Spot Rate
$1.00
1975 1980 1985 1990 1995 2000
C9 - 22
Forecast Bias
C9 - 23
Graphic Evaluation of Forecast Performance
z
Region of Perfect
downward bias
forecast
(underestimating)
Realized Value
line
Region of
upward bias
(overestimating)
x
x z
Predicted Value
C9 - 24
Graphic Evaluation of Forecast Performance
Using the Forward Rate as a Forecast for the British Pound
$2.50 Perfect
Forecast
Realized Spot Rate
Line
$2.00
$1.50
$1.00
$1.00 $1.50 $2.00 $2.50
Forecast (Forward Rate)
C9 - 25
Graphic Evaluation
of Forecast Performance
• If the points appear to be scattered evenly
on both sides of the perfect forecast line,
then the forecasts are said to be unbiased.
• Note that a more thorough assessment
can be conducted by separating the entire
period into subperiods.
C9 - 26
Comparison of
Forecasting Techniques
• The different forecasting techniques can
be evaluated
¤ graphically - by comparing the distances
from the perfect forecast line, or
¤ statistically - by computing the mean of the
absolute forecast errors, and then using a t-
test or a nonparametric test to determine
whether there is a significant difference in
the accuracy of the forecasting techniques.
C9 - 27
Forecasting Under Market Efficiency
C9 - 28
Forecasting Under Market Efficiency
C9 - 29
Forecasting Under Market Efficiency
C9 - 30
Exchange Rate Volatility
C9 - 31
Exchange Rate Volatility
C9 - 32
Online Application
C9 - 33
Application of Exchange Rate Forecasting
to the Asian Crisis
• Before the crisis, the spot rate served as a
reasonable predictor, because the central
banks were maintaining a somewhat stable
value for their respective currencies.
• But even after the crisis began, it is unlikely
that the degree of depreciation could have
been accurately predicted by the usual
models.
C9 - 34
Application of Exchange Rate Forecasting
to the Asian Crisis
• The large amount of foreign investment and
the fear of a massive selloff of the
currencies played key roles in the sharp
decline of the Asian currency values.
• However, these two factors cannot be easily
incorporated into a fundamental forecasting
model in a manner that will precisely identify
the timing and magnitude of currency
depreciation.
C9 - 35
Impact of Forecasted Exchange Rates
on an MNC’s Value
Technical Forecasting
Fundamental Forecasting
Market-based Forecasting
Mixed Forecasting
m
n
E CFj , t E ER j , t
j 1
Value =
t =1 1 k t
E (CFj,t ) = expected cash flows in currency j to
be received by the U.S. parent at the end of
period t
E (ERj,t ) = expected exchange rate at which
currency j can be converted to dollars at the end C9 - 36
Chapter Review
C9 - 37
Chapter Review
C9 - 38
Chapter Review
C9 - 39